Weekly European Monitor: EU Summit Disappoints, No Surprise

Takeaway: There is no one plan in crafting the Eurozone’s path forward. Spain’s bailout timing remains unknown as Europe trades on headlines and rumor

-- For specific questions on anything Europe, please contact me at to set up a call.


Positions in Europe: Short France (EWQ); Long German Bonds (BUNL)


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed up +1.7% week-over-week vs +2.1% last week. Top performers:  Cyprus +21.9%; Greece +5.6%; Spain +3.4%; France +3.4%; Denmark +2.7%; Italy +2.3%; Romania +2.2%; Germany +2.0%; Austria +2.0%. Bottom performers:  Ukraine -6.2%; Latvia -0.9%; Hungary -0.5%; Poland -0.5%.  [Other: UK +1.8%].
  • FX:  The EUR/USD is up +0.62% week-over-week vs -0.74% last week.  W/W Divergences:  SEK/EUR +1.31%; CZK/EUR +0.60%; NOK/EUR +0.37%; HUF/EUR +0.20%; RUB/EUR +0.09%; TRY/EUR +0.09%; DKK/EUR 0.00%; CHF/EUR -0.02%; RON/EUR -0.31%; PLN/EUR -0.32%; GBP/EUR -1.00%; ISK/EUR -1.87%.
  • Fixed Income:  The 10YR yield for sovereigns were mostly lower on the week for the periphery and higher for the core.  Greece declined the most week-over-week at -143bps to 16.78%, followed by Portugal -38bps to 7.67% and Spain -34bps to 5.34% and Italy -20bps to 4.77%. Germany rose the most at +12bps to 1.60% and France gained +2bps to 2.2%.

Weekly European Monitor: EU Summit Disappoints, No Surprise - 33. yields


Weekly European Monitor: EU Summit Disappoints, No Surprise - 333. eurusd


Weekly European Monitor: EU Summit Disappoints, No Surprise - 33. contracts


EU Summit Disappoints, No Surprise

The EU Summit concluded its two day meeting today and leaders issued a statement indicating that they will continue to work towards the goal of a single bank supervisor “with the objective of agreeing on the legislative framework by 1 January 2013” and “work on the operational implementation will take place in the course of 2013”. 


One of the main struggles that Eurocrats are running up against is how to create a fiscal and banking union. It appears that they’re trying to craft both simultaneously; however recent discussions suggest that a banking union is getting more attention which we find problematic because it means Eurocrats are putting the cart ahead of the horse.


We’ve written about it for many weeks, but the importance of establishing a fiscal union is critical for the Eurozone if it hopes to retain its existing structure (the global crisis showed the flaws of only having a monetary union). We’re of the opinion that states will very unwillingly give up their fiscal sovereignty, which should drive decision from a core consensus on how to set up a fiscal union far afield. 


That said, given the linkage between sovereigns and their banks and across other member states, until there is a fiscal union there is little hope of having a functional banking union given the need for an authority (or authorities) to regulate both fiscal (think veto national budgets) and mandate banking conditions as well as determine bailouts of sovereign and banks throughout the region. And to boot, European politicians are considering crafting a banking union not only around the 17 Eurozone member states, but the entire EU27. 


So what are the key and ongoing points of indecision following the Summit?

  • Banking Union:  The statement released following the Summit did not discuss whether ECB supervision would apply to all 6K banks in the region or just the systemically important institutions (Merkel recently said that this still needs to be hashed out and is more in favor of only the larger banks).
  • Greece:  Nothing specific to future bailouts of Greece or debt restructuring was mentioned. “We welcome the determination of the Greek government to deliver on its commitments and we commend the remarkable efforts by the Greek people."
  • ESM:  No further detail on the scope of the ESM to directly recapitalize troubled banks was offered. Does the facility have to be first completely capitalized to lend? Will legacy assets be eligible for a loan?  

Of note this week was a paper from the EU Council’s top legal adviser contending that a plan to create a single supervisory mechanism for Eurozone banks is illegal and goes “beyond the powers” permitted under law to change governance rules at the ECB.  We also heard France, the second largest economy in the Eurozone, express reluctance to cede sovereignty on fiscal policy.


This week’s Summit simply confirmed that there will be another plan to make a plan and plenty of details and questions that remain unanswered. David Einhorn's chart below sums this up pretty well:


Weekly European Monitor: EU Summit Disappoints, No Surprise - 11. einhorn



Spanish Bailout in the Crosshairs

This week an unnamed senior Finance Ministry official said that Madrid is considering requesting a credit line, rather than a full-scale bailout from the ESM, and may qualify for the ECB's OMT.


Germany said it was open to a credit line for Spain, which makes some sense given the scope of the ESM undefined.


Yet we’re no further or closer this week to determining the timing of a Spanish sovereign bailout.

  • Will a formal bailout request be linked to regional elections in Basque Country and Galicia as soon as this Sunday or Catalan elections on November 25th?
  • How will Spanish bonds act in light of last week’s decision from the S&P to downgraded Spain by 2 notches to BBB- ? The 10YR is currently trading with a yield of 5.34%, well off highs of 7.5% in late July of this year.  Could we see a selloff by investors worried that the country's credit rating will be cut to junk? (Note: Moody’s confirmed Spain's government bond rating at BAA3, with a negative outlook this week).


Our Real-Time positions in Europe remain Long German Bunds (BUNL) and short France (EWQ).  See our note on 10/16 for our position on France. 



The European Week Ahead:

Sunday:  Spanish regional elections in Basque Country and Galicia


Monday: 2011 Eurozone Government Debt/GDP Ratio; Aug. Spain Mortgages-capital loaned, Mortgages on Houses; Aug. Greece Current Account


Tuesday: Oct. Eurozone Consumer Confidence – Advance; Sep. UK BBA Loans for House Purchase; Oct. France Production Outlook Indicator


Wednesday: Oct. Eurozone PMI Manufacturing and Services – Advance, PMI Composite; 2Q Government Debt; Germany DIHK Trade and Industry Group Releases Fall Outlook Survey; Oct. Germany PMI Manufacturing and Services – Advance, IFO Business Climate, Current Assessment and Expectations; Oct. UK CBI Trends Total Orders, Selling Prices and Business Optimism; Oct. France PMI Manufacturing and Services - Preliminary; Sep. France Jobseekers; Oct. Italy Consumer Confidence Indicator


Thursday: Sep. Eurozone M3; 3Q UK GDP - Advance; Aug. UK Index of Services; Spain Sep. Producer Prices; Italy Sep. Hourly Wages; Aug. Italy Retail Sales


Friday: Nov. Germany GfK Consumer Confidence Survey; Sep. Germany Import Price Index; Oct. France Consumer Confidence Indicator, Business Survey Overall Demand; 3Q Spain Unemployment Rate; Oct. Italy Business Confidence, Economic Sentiment



Call Outs:


UK - BOE Minutes from October 3-4 meeting: officials were split on need for more stimulus.


France - French Finance Minister Pierre Moscovici said in an interview with Les Echos that he had "positive" discussions with Moody's regarding the country's triple-A rating. Recall that Moody's said in early September that it would conclude an assessment of France, which it currently rates triple-A with a negative outlook, sometime in October.


Banking Union - ECB President Draghi said that the ECB may not be operational as the single supervisory mechanism for Eurozone banks until 2014. He noted that “It’s very important that the council regulation enters into force January 1 but that doesn’t mean supervision will be in place on January 1 from an operational view point.”


Banking Union - citing EU officials Britain is pushing for changes to a proposed Eurozone banking union to dilute the power of the ECB. Britain plans to propose a system that would give countries outside of the banking union the possibility of blocking those within the group from banding together to influence EU-wide regulations, such as defining the type of capital reserves that qualify as a cushion against banks' risky assets. While the article noted that Britain is still in favor of a banking union, it said that its push for an effective veto for non-euro countries (something that has been discussed before in the press) could slow down the progression.


Spain - Faces a refinancing hurdle of €29.5B at the end of October. Finance Minister Luis de Guindos stressed that he was "very comfortable" with the debt repayments.


France - French Prime Minister Jean-Marc Ayrault said on Tuesday that reforms to make French industry more competitive will be spread over two to three years. While he did not detail what measures would be taken to improve companies' competitiveness. He also reiterated that France must meet its target of reducing the deficit to 3% of GDP by the end of 2013 from a projected 4.5% this year.


France - France's business federation has vetted its frustrations with Socialist President François Hollande’s polices.  The group is rightly concerned about a competitiveness drag, including from Article 6 of the new tax law, which raises the top rate of capital gains tax from 34.5% to 62.2%. For reference these levels compare with 21% in Spain, 26.4% in Germany and 28% in Britain.



Data Dump:


Eurozone CPI 2.6% SEPT Y/Y vs 2.7% AUG

Eurozone ZEW Economic Sentiment -1.4 OCT vs -3.8 September

Europe EU27 New Car Registrations -10.8% SEPT Y/Y vs -8.9% AUG [dropped the most in 2 years]

Eurozone Construction Output -5.5% AUG Y/Y vs -6.2% JUL    [0.7% AUG M/M vs 0.1% JUL]


Germany ZEW Current Situation 10.0 OCT vs 12.6 September

Germany ZEW Economic Sentiment -11.5 OCT vs -18.2 September

Germany Producer Prices 1.7% SEPT Y/Y vs 1.6% AUG


UK PPI Input -0.2% SEPT M/M vs 1.9% AUG   [-1.2% SEPT Y/Y vs 1.1% AUG]

UK PPI Output 0.5% SEPT M/M vs 0.5% AUG   [2.5% SEPT Y/Y vs 2.3% AUG]

UK CPI 2.2% SEPT Y/Y vs 2.5% AUG

UK RPI 2.6% SEPT Y/Y vs 2.9% AUG

UK ILO Unemployment Rate 7.9% AUG vs 8.1% JUL (Olympics boosts job creation)

UK Jobless Claims Change -4k SEPT vs -14.2K AUG

UK Retail Sales with Auto Fuel 2.5% SEPT Y/Y vs 2.5% AUG

UK Rightmove House Prices  1.5% OCT Y/Y vs 0.7% SEPT

UK Public Sector Net Borrowing 10.7B GBP SEPT vs 10.8B GBP AUG


Italy Industrial Orders -9.0% AUG Y/Y vs -4.9% JUL


Switzerland Credit Suisse ZEW Expectations -28.9 OCT vs -34.9 September

Switzerland Exports 2.6% SEPT M/M (exp. 0.5%) vs 0.4% AUG

Switzerland Imports 3.0% SEPT M/M vs 2.6% AUG

Switzerland Producer and Import Prices 0.3% SEPT Y/Y vs -0.1% AUG


Netherlands Consumer Confidence -32 OCT vs -29 SEPT

Netherlands Retail Sales 0.9% AUG Y/Y vs -3.9% JUL

Ireland PPI 2.2% SEPT Y/Y vs 6.0% AUG


Sweden Unemployment Rate 7.4% SEPT vs 7.2% AUG

Finland CPI 2.7% SEPT Y/Y vs 2.7% AUG


Portugal Producer Prices 4.6% SEPT Y/Y vs 4.2% AUG

Austria CPI 2.7% SEPT Y/Y vs 2.2% AUG


Slovakia CPI 3.8% SEPT Y/Y vs 3.8% AUG

Slovenia Unemployment Rate 11.6% AUG vs 11.7% JUL

Slovenia PPI 0.7% SEPT Y/Y vs 0.4% AUG


Czech Republic Export Price Index 3.7% AUG Y/Y vs 4.7% JUL

Czech Republic Import Price Index 5.8% AUG Y/Y vs 5.5% JUL

Czech Republic PPI 1.7% SEPT Y/Y vs 1.9% AUG


Poland CPI 3.8% SEPT Y/Y vs 3.8% AUG

Poland Producer Prices 1.8% SEPT Y/Y vs 3.0% AUG

Poland Sold Industrial Output -5.2% SEPT Y/Y vs 0.5% AUG


Russia Industrial Production 2.0% SEPT Y/Y vs 2.1% AUG

Russia Producer Prices 11.6% SEPT Y/Y vs 6.6% AUG

Russia Disposable Income 3.8% SEPT Y/Y vs 6.8% AUG

Russia Retail Sales 4.4% SEPT Y/Y vs 4.3% AUG

Russia Unemployment Rate 5.2% SEPT vs 5.2% AUG


Turkey Unemployment Rate 8.4% JUL vs 8.0% JUN

Turkey Consumer Confidence 88.8 SEPT vs 91.1 AUG



Interest Rate Decisions:


(10/18) Turkey Benchmark Repo Rate UNCH at 5.75%

(10/18) Turkey Overnight Lending Rate CUT 50bps to 9.50%



Matthew Hedrick

Senior Analyst

Scouting Information

This note was originally published October 19, 2012 at 07:32 in Early Look

“What defined a good scout? Finding out information that other people can’t.”

-Billy Beane


I was eating a delicious lobster roll on a pier in Camden, Maine yesterday and all of a sudden my iPhone went batty. The market went from straight up, to straight down. Google was “halted.”


So, I jogged back up to my hotel room, fired up my machines, ran GOOG through my quantitative screens – and there it was – someone knew something! Someone always does. They don’t always get caught.


Most people in this business are honest, hard working and intelligent enough to not take on orange jump suit risk when they buy or sell securities. But some people are so “smart” they are stupid. This isn’t baseball. “Finding out information that other people can’t”, in many cases, is illegal. That’s why we have to continuously evolve our analytical processes so that we can win more than we lose.


Back to the Global Macro Grind


The aforementioned quotes come from another excellent chapter in Nate Silver’s The Signal And The Noise, “All I Care About is W’s and L’s.” Silver has credibility because he built (and sold) a projection system for baseball called PECOTA. The chapter’s title is a quote from the “not physically gifted” Dustin Pedroia of the Boston Red Sox – a player that PECOTA screened as a stud when scouts disagreed.


That’s where you really win in this game – when you make a bet on a stock, commodity, bond, etc. that sits outside of consensus. This doesn’t just happen. Scouting for ideas requires a fast and flexible process. If you are doing it legally, it’s a grind. “Billy Beane, the protagonist of Moneyball, sees relentless information gathering as the secret to good scouting.” (page 99)


As you build your team, machines, and processes, it actually gets harder as you achieve success. People who cut corners and cheat don’t want you to win. They’ll do whatever it takes to take you down. So, you have to be resilient. As Silver reminds us, the real lesson of Moneyball is that Beane “was very threatening to people in the game; it seemed to imply that their jobs and livelihoods were at stake.”


Here’s what our multi-factor, multi-duration, research and risk management process is telling me this morning:

  1. US Dollar Index held its long-term TAIL line of $78.11 support
  2. Euro (EUR/USD) failed, again, at its long-term TAIL risk line of $1.316 resistance
  3. US Treasury Yield (10yr) made another lower-high vs the SEP high of 1.89%
  4. SP500 made a lower-high on accelerating volume (on yesterday’s down move) vs SEP’s 1474 high
  5. Russell 2000 continues to make a series of lower-highs versus the 846 closing high of March 2012
  6. US Equity Volatility (VIX) continues to make higher long-term lows, holding 14.22 TAIL risk support
  7. Technology Stocks (XLK) have gone from the market’s top performer to its worst (down -2.8% OCT)
  8. Financial Stocks (XLF) are immediate-term TRADE overbought, leading what’s left of the market’s gainers
  9. Chinese Stocks (Shanghai Comp) failed to show any follow through at its 2141 TREND line overnight
  10. European Stocks are making lower-highs, across the board, versus their SEP closing highs (7451 DAX)
  11. Commodities (CRB Index) remain a bubble that’s popping; TAIL risk line for CRB = 312
  12. Gold failed to overcome its immediate-term TRADE line of 1761 resistance yesterday on green
  13. Copper, down -1.1% this morning, failed, again, at TRADE ($3.76) and TAIL ($3.95) resistance 

I’ll stop there. These are both quantitative signals and noise (they both matter). And stopping on lucky 13 on the anniversary of 1987’s Black Monday is just me being cute. So is the storytelling that “everyone is bearish and you have to buy stocks because they are up YTD.” After a -23% down day on October 19th of 1987, the market still “closed up YTD” too.


On the research side (very different than the quantitative side of what we do, but critically complimentary), here’s what’s new this morning:

  1. Microsoft (MSFT) joins IBM, INTC, and GOOG as just one more example of growth and #EarningsSlowing
  2. Chinese Foreign Investment (FDI) dropped -6.8% y/y in SEP (vs -1.4% AUG), the 10th month of outflows in the last 11
  3. Federal Reserve Balance Sheet assets of $2.849 TRILLION is actually falling (slope) y/y at this point by -$6.6B this wk

Slapping all 16 of those pieces of Hedgeye Scouting Information onto my notebook this morning doesn’t make me particularly bullish on anything other than buying US Dollars and bonds. Why pretend to be smarter than the market when the market can tell me when not to swing at outside pitches?


One by one, they’re picking off the bad guys in this business. Using steroids to juice returns is no longer cool. As Nate Silver writes at the end of chapter 3, “in the most competitive industries, like sports, the best forecasters must constantly innovate…. The key is to develop tools and habits so that you are more often looking for ideas and information in the right places.” (page 106)


It’s October. The good news is it’s a cleaner game than it was 5 years ago and they don’t have Candy or replacement umps. Batter up!


My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, GOOG, and the SP500 are now $1731-1751, $111.71-113.54, $79.02-79.82, $1.29-1.31, 1.74-1.82%, $687-731, and 1444-1468, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Scouting Information - Chart of the Day


Scouting Information - Virtual Portfolio

ENERGY: Becoming Efficient

Hedgeye Energy Analyst Kevin Kaiser presents us with a unique chart for today. It shows recent gains in fuel efficiency as well as target rates for several different countries which make up some of the world’s largest economies. Says Kaiser, “The long-term impact of improvements in fuel efficiency on oil demand is underestimated, in our view.”


ENERGY: Becoming Efficient - 1

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Ice-ing On The Cake






IntercontinentalExchange (ICE), rival to CME Group, is going to close its open outcry trading pits in lower Manhattan today. It is the end of an era for those who are used to yelling and shouting orders for everything from cotton to cocoa. The proliferation of electronic trading across multiple asset classes has helped improved price discovery, costs and availability to traders both retail and institutional. There are hardly any independent futures exchanges left in the United States aside from the two giants: CME Group and ICE. CME’s floor pits in Chicago are hanging on borrowed time and will likely close sometime in the near future. It’s the end of an era and the beginning of a new one - for better or for worse.




Call us crazy, but our #EarningsSlowing theme continues to gain traction as more companies report this month. It seems that everyone from Microsoft (MSFT) to Morgan Stanley (MS) to AMD (AMD) are feeling the hurt from the global macroeconomic environment. If you think stocks look “cheap” here and are poised for another “big time rally,” you are mistaken. Cheap gets cheaper and the November election will play a big role in where we’re headed as a country and economy into 2013.






Cash:               DOWN


U.S. Equities:   Flat


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  UP


Int'l Currencies: Flat  








Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

  • TAIL:      LONG            



Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TAIL:      LONG



While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

  • TAIL:      LONG







“BREAKING: Obama credits Tiger win to GM bailout #fairshare” -@KeithMcCullough




“The Bible tells us to love our neighbors, and also to love our enemies; probably because they are generally the same people.” -G.K. Chesterton




Microsoft profit down 22% on falling sales of Windows. 




The Macau Metro Monitor, October 19, 2012




Passenger traffic at Singapore's Changi Airport rose 4.84% YoY in September to 4,002,344.